Lear Capital: Gold and Stocks Get Legally Separated

For weeks we watched stocks rise while gold and silver prices pulled back. Observing this, it would be easy for any investor to get caught up in the markets while ignoring gold and silver as viable diversification tools.In mid May, while stocks reached record highs, gold prices pulled back to their lowest levels since January 2011. Since then, the Dow has given up more than 500 points while gold prices have edged higher and stubbornly refused to drop below their two-year lows. With the cost of gold production now estimated between $1200 and $1300 an ounce, analysts believe the gold price can’t go much lower. Indeed, the recent rise in demand for physical gold gives credence to this thesis.

Stocks, on the other hand, raise a big question mark when asked how low can they go? Keep in mind, stocks have likely been the beneficiaries of massive Fed stimulus. Yea yea! Not everyone agrees with that but when you pump up the economy by 6% and only get 2.5% growth, the other 3.5% had to go somewhere. You tell me. When the last round of Quantitative Easing was announced, the Dow was at 13,500. Until $85 billion a month of Fed easing could take effect, the Dow fell to 12,500 before Superman caught it in freefall and started the Dow on its upward march to record highs.

Is the Dow headed south again? Back to pre-QE3 levels? The Fed has intimated a tapering of stimulus to which many attribute recent stock weakness. The mere threat of pulling the plug on stimulus has also affected bond prices as prices have fallen and rates have risen. And, while in the past, gold and silver prices have reveled in the prospect of inflation due to money printing, signs indicate gold too is anticipating higher interest rates, a collapse in stock prices and a bursting bond bubble. Is the flight to the safety of Gold now boarding? The last time interest rates soared from near record lows was in the late 70s. During that run higher, gold prices rose more than 2000%. Contrary to what many believe, rising rates could become gold’s best friend. As gold now appears to have filed papers for a legal separation from stocks, investors appear to have the jitters for both stocks and bonds. Here’s my opinion. Fed stimulus has reached its limit as to its effect on stocks and bonds. No one believes it can last forever. Face it! Investors are selling stocks in order to take advantage of higher prices. If you want to be honest, stocks are significantly weaker over the last 3 weeks and gold is stronger. Even when the paper traders pushed gold prices lower, physical demand was higher. If the paper traders can no longer hold gold prices down and the money printers can no longer hold the price of stocks and bonds up, it seems the divorce between gold prices and stock prices is about to become final.

As always, this is my opinion. Maybe you share it and maybe not. But if you do share it, I would be honored to have you follow me @DaveTheGoldDr for more breaking gold news and my opinions.